Volatility is always present in the financial markets, but as we have seen recently,
the degree of volatility can vary significantly over time.

During periods of heightened volatility – when uncertainty and investor emotions
run high – it is important to revert to the basics and review the key elements
that drive long term investment returns. One of those key elements is corporate earnings.

The fourth quarter of 2017
capped an impressive year for corporate earnings. Consensus earnings growth estimates
for the S&P 500® had been about 12% for the fourth quarter, year-over-year.
However, as actual earnings were reported, nearly 75% of companies posted earnings
that exceeded expectations – a very high level.

The actual earnings growth rate for the final quarter of 2017 came in at about
15%, with revenue growth at about 8%. Reported earnings for all of 2017 were up a
strong 12% on 7% revenue growth.

With global growth showing wide-spread
improvement, it should not be surprising that earnings are trending higher, particularly
for larger multi-national companies. Profit margins continue to hold at record levels
as corporations maintain tight control on costs, and interest rates remain at historically
low levels -- both of which are positive trends for equity investors.

What’s Ahead?

With 2017 in the rear view mirror, investors are now focusing on expectations for
2018. These expectations are more uncertain due to the major impact of recently enacted
tax legislation.

Prior to tax reform, earnings for the S&P 500 were expected to grow by 10%
to 12%, as many of the fundamental strengths of 2017 continued to provide support
into 2018. However, as corporations have begun to factor in the impact of the new
tax law, expectations have been ratcheting up. Corporate earnings for 2018 are
now estimated to grow about 19%, with revenue growth expected to remain robust at
about 7% to 8%.

Although price-earnings ratios (P/E) have edged up steadily in recent years as
stock prices rose, improving corporate earnings have helped keep P/Es from reaching
unsustainable levels.

In addition to a gradual rate increase,
the Fed began a long-term effort to trim its $4.5 trillion balance sheet in October
2017 by ending its policy of purchasing Treasury issues and mortgage-backed securities.
With liquidity marginally diminishing, interest rates could rise, affecting stock
and bond prices. Consumer spending, business development and other areas of the economy
could also be affected. However as the Fed cautiously and systematically reduces its
balance sheet and its impact on the capital markets, we believe the current economy
is strong enough to endure these monetary tightening measures.

Although rising inflation and interest rates have helped spur a spike in volatility,
investors should be encouraged by the positive and offsetting support that rising
corporate earnings should provide for potential market returns.

Here are some of the other leading issues facing the economy and the markets in
the near term:

Headwinds

Fed balance sheet reduction.The Federal Reserve
Board declined to raise the Federal Funds target rate at its February meeting, but
the board has indicated that at least three – and possibly four – small
rate hikes could be in store for 2018. The Fed is expected to raise rates by
0.25% in March.

In addition to a gradual rate increase, the Fed began a long-term effort to trim
its $4.5 trillion balance sheet in October 2017 by ending its policy of purchasing
Treasury issues and mortgage-backed securities. With liquidity marginally diminishing,
interest rates could rise, affecting stock and bond prices. Consumer spending, business
development and other areas of the economy could also be affected. However as
the Fed cautiously and systematically reduces its balance sheet and its impact on
the capital markets, we believe the current economy is strong enough to endure these
monetary tightening measures.

Low wages. Despite strong employment growth, wages remain low,
with only 2.9% wage growth over the past 12 months, according to the U.S. Department
of Labor. However, wage growth has picked up slightly, with average non-farm
payroll wages climbing $0.20 the past two months to $26.74 an hour.

Stock valuations. As noted above, stock
prices have continued to climb the past few years. As a result, the P/E of the S&P
500 reached a 14-year high of over 18 in January before edging back down in February.1

Tailwinds

New tax law.The new tax law changes, including
a significantly lower corporate tax rate, have already had a favorable impact on projected
corporate earnings and capital investments, as we discussed above. That should
also translate to favorable overall economic growth, with gross domestic product (GDP)
growth expected to be bolstered by as much as 0.50% - 1.00% over the next few years.
However, given the new tax law’s complexity, it will take some time for
its effects to be fully realized. (See: How
Will the New Tax Law Affect You?)

Strong economy. The tax law could help boost 2018 GDP growth well
beyond the 2.3% rate of 2017 and the 1.5% rate of 2016.1

Retail sales growth. Retail sales have been strong in recent
months, although they slipped 0.3% in January.2 Compared with a year
earlier, retail sales are up 3.6%.

Personal income. With personal income on the rise (disposable
personal income increased by 3.9% in the fourth quarter of 20173), consumers
have more money to spend and invest.

Low unemployment. The unemployment rate has remained at a 17-year
low of 4.1% the past few months.

Oil remains solid. Although oil prices sank with the equity markets
in early February, they rebounded well throughout the remainder of the month. A
strengthening oil market has led to a rebound in U.S. drilling and production operations.
A strong oil industry could mean improving profits and an increase in well-paying
jobs.

Expectations

We believe GDP growth could move over 3.0% in the coming years.

Combined with the tight labor market, the added boost in GDP growth could finally
drive up wages. We believe employment will remain strong, although the low unemployment
rate may make continued job growth increasingly difficult.

While stock valuations remain an issue, we believe these high valuations are justified
if corporate earnings continue to rise, the economy remains strong, no imbalances
or surprises emerge, and interest rates stay relatively low.

We expect volatility to continue in both the equities and fixed income markets
as the Federal Reserve, European Central Bank and other central banks pursue a tightening
monetary policy. Heightened geopolitical risks could also play a role in increased
volatility in the coming year.

With the Fed’s policy of raising short rates while reducing its bond portfolio,
real returns from high quality bonds will continue to be low, and could even be modestly
negative if inflation moves above 2% - as we expect.

The industry consensus view for inflation is 2.3% for 2018. This would be a continuation
of a subdued trend that has been in place for a number of years.

International developed market equities continue to look attractive relative to
domestic equities. We remain neutral in our view toward emerging market equities.
Stability in China, and more importantly stability in foreign exchange markets, is
essential for this market to continue to perform well.

In the U.S., the economic recovery should continue if personal income and consumer
spending remain solid, wages improve, and corporate earnings continue to increase.

All information and representations herein are as of March 1, 2018, unless
otherwise noted.

The views expressed are as of the date given, may change as market or other conditions
change, and may differ from views expressed by other Thrivent Asset Management associates.
Actual investment decisions made by Thrivent Asset Management will not necessarily
reflect the views expressed. This information should not be considered investment
advice or a recommendation of any particular security, strategy or product.

Indexes are unmanaged and do not reflect the fees and expenses associated with
active management. Investments cannot be made directly into an index.

The S&P 500® Index is a market-cap weighted index that represents the average
performance of a group of 500 large-capitalization stocks.

Past performance is not necessarily indicative of future results. Investment
decisions should always be made based on an investor’s specific financial needs,
objectives, goals, time horizon and risk tolerance.

Insurance products issued or offered by Thrivent Financial, the marketing name for Thrivent Financial for Lutherans, Appleton, WI. Not all products are available in all states. Products issued by Thrivent Financial are available to applicants who meet membership, insurability, U.S. citizenship and residency requirements. Securities and investment advisory services are offered through Thrivent Investment Management Inc., 625 Fourth Ave. S., Minneapolis, MN 55415, a FINRA and SIPC member and a wholly owned subsidiary of Thrivent. Thrivent Financial representatives are registered representatives of Thrivent Investment Management Inc. They are also licensed insurance agents/producers of Thrivent. Fee-based investment advisory services are available through qualified investment advisor representatives only.

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